Pop! 3 To Buy If Biotech Stocks Burst

By Markets Fool.com

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Source: Flickr user Andrew Magill.

Biotechnology has been one of the best-performing industries over the past two years, but a flood of venture capital and IPOs, and a big run-up in early clinical-stage companies, has led many industry watchers to fret that biotech stocks have run too far, too fast, and that the industry is ripe for a big drop.

With the biotech industry ETF flirting with all-time highs, let's consider some companies that might be worth picking up on sale if the biotech bubble pops.

The bigger they are...
When markets fall, even the biggest of the big drop, and the biotech industry is no exception. That means that if biotech stocks roll-over, then shares of industry Goliaths Biogen, Gilead Sciences , and Celgene Corporation could take it on the chin.

Of the three, it's Biogen that's already fallen the most.

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Shares of the market share-leading maker of multiple sclerosis drugs have toppled by more than 15% from their March peak after the company admitted in its first quarter earnings call that script growth for its red-hot selling oral MS drug Tecfidera is slowing.

Although Tecfidera script growth may be cooling off, Tecfidera still posted 63% year-over-year sales growth last quarter, and it's still on pace to deliver more than $3.3 billion in full-year sales. That's nothing to sneeze at.

Since Biogen should still deliver solid double-digit top- and bottom-line growth this year, picking up shares at around 20 times next year EPS may make sense.

Although Celgene's shares haven't fallen as sharply as Biogen's, they've still retreated almost 10% from $128.50 on March 20, and that could mean that there's some value in buying its shares, too.

Currently, investors will only pay 18.5 times forward earnings to buy Celgene, but what makes Celgene even more compelling to me is its long-term outlook. The company projects that its EPS will eclipse $12.50 in 2020. If Celgene can deliver on that guidance, then buying Celgene shares at these levels, or lower, could end up being profit-friendly over the long haul.

Finally, although Gilead Sciences' shares are near all-time highs, a valuation argument can still be made for picking up its shares on a dip as well.

Gilead Sciences' strong first quarter results prompted the company to bump up its full year sales guidance and that has led analysts to increase their EPS outlook to $10.86 this year and $11.02 next year. That gives Gilead Sciences a low current and forward P/E ratio of 12.5 and 9.9, respectively. If shares slip, then Gilead Sciences could prove to be the best bargain in the industry.

Thinking small?
Although big-cap biotech companies offer a bit more clarity for investors than their tiny counterparts, it's small-cap biotech stocks that could fall the most in a sell-off. Many small-cap biotech companies have already retreated by 10% or more from their spring peak, and a few of these companies have late-stage clinical programs that could warrant taking on the significant risk of stepping in and buying them if they drop by even more.

In my opinion,Ophthotech Corporation is one of them.

Unlike some clinical-stage biotech companies that are working on drugs to replace existing therapies, Ophthotech is developing a drug that can help the multibillion-dollar blockbuster drugs Lucentis and Eylea work better.

Ophthotech's Fovista delivered solid mid-stage trial results showing that using it alongside Lucentis improves vision in patients with age-related macular degeneration more than using Lucentis alone. Those phase 2 results prompted Lucentis manufacturer Novartis to agree to pay up to $1 billion to Ophthotech for the overseas rights to Fovista.

Since Ophthotech's shares have fallen from a high of $58 in March to $52, and Ophthotech's market cap of $1.8 billion isn't that much above the maximum that Novartis may pay it, taking a risk on this company could pay off if phase 3 trials pan out.

Another small-cap biotech stock that could end up on sale is Portola Pharmaceuticals .

Portola is developing the first antidote to the billion-dollar blockbuster Factor Xa anticoagulants and it's already released phase 3 data showing that its drug andexanet alfa successfully reverses the effect of both Xarelto and Eliquis. That's important, because next-generation anticoagulants like these two are increasingly displacing warfarin as the go-to medicine for preventing blood clots in heart-disease patients and patients having undergone orthopedic surgery.

Since andexanet alfa could become the first and only reversal agent for these drugs to win FDA approval, and a filing for that approval could come as soon as this year, investors may end up deciding that the company is worth more than its current $2 billion market cap. If so, then any drop in Portola's shares could be a perfect opportunity to buy.

Tying it together
Biotech stocks can be incredibly volatile, particularly when they're dropping from levels that people believe may have been over-inflated. As a result, buying any stock within this industry -- even leaders like Biogen, Celgene, or Gilead Sciences -- poses a risk. However, for investors willing to accept the risk of owning stocks in this industry, a market sell-off could create opportunities, even in small-cap companies with compelling late-stage research programs like Ophthotech and Portola.

The article Pop! 3 To Buy If Biotech Stocks Burst originally appeared on Fool.com.

Todd Campbell owns shares of Celgene, Gilead Sciences, Ophthotec, and Portola. Todd owns E.B. Capital Markets, LLC. E.B. Capital's institutional research clients may have positions in the companies mentioned. The Motley Fool recommends Apple, Celgene, and Gilead Sciences. The Motley Fool owns shares of Apple and Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.